Guest Articles

It’s an odd reaction, because most of the same people know what the evidence says. If you’re growing your wealth, the number one contributor will be owning assets that are expected to outpace inflation.

The research – identifying what achieves better investment returns over the long run – keeps things simple, unglamorous even: contribute to a diversified portfolio matched to the rate of return your life plan actually requires.

Cash almost never keeps pace with inflation, let alone exceed it. When a sudden lump sum arrives – a bonus, a property sale, or divestment of a company – the sensible move is usually to put it to work promptly, so compounding starts sooner.

The instinct to wait is understandable. It rests, though, on a misreading of what a record high actually is.

Two types of movement 

Picture yourself on a rising escalator while playing with a yo-yo. If all you do is stare at the yo-yo going up and down on its string, it looks a little chaotic. But, if you zoom out, you’ll notice something: the escalator is still moving upwards, raising the yo-yo too. It’s exactly how investments look: the yo-yo represents the short-term market ups and downs; the escalator is the market’s long-term direction, along with your wealth.

A record sounds like a rare event. Sporting records are celebrated precisely because they are rare, and when they happen, the assumption is that they will remain unbeaten for a long time.

On an escalator, though, every bounce near the top of the string is higher than the last. For a market that grows over long periods, a record is closer to routine. If the general direction of travel is upwards across decades, the market spends much of its time passing its old high-water mark and setting new ones. Records arrive in clusters, often for months on end, and then don’t arrive again for years. Neither pattern is a signal.

A decline can begin at any time, and most begin unexpectedly. A record high therefore guarantees nothing about the months ahead.

Bargains rarely arrive on schedule

Waiting in cash can feel prudent. For a great many investors, it’s expensive.

The decline you are waiting for – the one that lets you buy shares, funds or anything else at a discount - might not arrive for a long time. In the meantime, your money sits idle while the growth happens somewhere you’re not.

There’s a further problem, generally underestimated. If the decline does come, it will arrive wrapped in bad news. A buying opportunity rarely feels like one when you’re standing in it. Every fall looks like the start of a bigger one. Once you’re inside that doom loop, investing with any confidence becomes very hard.

The best investors I’ve known accept their timing will never be perfect and invest anyway. They embrace the uncertainty but are nevertheless systematic, rather than attempting to outguess it.

Panic can arise when fixating on the yo-yo. Here’s where the average investor goes wrong – they focus on every dip, swing and headline. When markets drop, they sell everything, waiting for things to settle and then trying to time when to get back in. When markets go sideways – perhaps even for two years or more – they can get bored and frustrated. 

Many people convince themselves their strategy isn’t working, and fixate upon what’s hot right now, only to discover that hot investment can quickly go cold, and they should’ve stayed with their original strategy longer. All they’re really doing is buying high and selling low, repeatedly. This is why most investors underperform the market.

Control the part you can control

Time matters for your money as much as for markets. Cash you won’t touch for years belongs somewhere quite different from money you need soon. Getting that separation right does more for your long-term returns than any attempt to guess the market's next turn. It’s the least interesting decision in investing and comfortably the most valuable.

So, if you have money to put to work and your plan calls for it, a record high isn’t a reason to hold back. The principle to apply to excess cash - grounded in Nobel prize-winning science – is known as “investing by sunset”. Money goes to work as soon as it’s available, rather than waiting for a better day.

If handing over a large sum in one go still makes you uneasy, commit now to investing it in equal amounts on set dates over the coming months. The point is, the schedule is firmly fixed in advance, not left to how the market feels on the day.

Feeling uneasy at a high is absolutely normal. Investing well is counterintuitive to the emotions evolution has wired us with. Over long periods, without guarantees at any point, markets have rewarded those who own a diversified mix of shares and stay owners, whether contributing a monthly amount or committing excess cash to their long-term wealth. 

That reward is measured in future purchasing power, more than inflation, which is what pays for the future life and the things that matter to us most.

Author: Sam Instone, Managing director, AES

Disclaimer: Capital at risk. Any examples used are for illustrative purposes only, and you may get less back than the figures shown. Any financial promotions are intended for information purposes only and do not constitute an offer to invest or provide personal financial advice or tax advice. We do not take any responsibility for third-party websites and content linked to from this channel. Issued on behalf of AES Middle East Insurance Broker LLC, registered with the Ministry of the Economy, licence 571368, commercial registration 75162, regulated by the UAE Central Bank, licence no. 189. This material is intended for Retail Clients within the UAE.